• 03/12/2021

$47,000 gone: Major new mortgage rules from Monday

Lucy Dean| Yahoo Finance| 30 October 2021

$47,000 gone: Major new mortgage rules from Monday (yahoo.com)

Australians hoping to buy property will be forced to prove they can repay their mortgage if rates rise 3 per cent, under new rules coming into place on Monday 1 November. 

The Australian Prudential Regulation Authority (APRA) announced the higher stress test earlier in October, increasing the test from 2.5 per cent to 3 per cent. 

That means that banks will need to check whether borrowers can manage repayments if interest rates increase by 3 per cent, or that they can meet the bank’s own serviceability floor if that is higher. 

Big four bank serviceability floor rates

(Source: RateCity)
(Source: RateCity)

According to APRA, the restrictions will reduce borrowers’ maximum borrowing capacity by around 5 per cent. 

For a family of four with an annual household income of $150,000, their maximum borrowing power would fall by an estimated $46,900, according to RateCity.com.au analysis. 

And for a single borrower earning $100,000, their maximum borrowing capacity will fall by around $34,900.

Impact on a family of four looking to take out a home loan 

(Source: RateCity) Calculations are based on CBA’s serviceability calculator for a borrower taking out a fixed rate owner-occupier loan paying principal and interest with a revert rate of 3.85%. Household income assumes one adult working full-time and one adult working part-time earning half the wage with two dependent children and no other debts. Minimum household expenditure is applied, depending on income.
(Source: RateCity) Calculations are based on CBA’s serviceability calculator for a borrower taking out a fixed rate owner-occupier loan paying principal and interest with a revert rate of 3.85%. Household income assumes one adult working full-time and one adult working part-time earning half the wage with two dependent children and no other debts. Minimum household expenditure is applied, depending on income.

Impact on a single person taking out a home loan

(Source: RateCity) Calculations are based on CBA’s serviceability calculator for a borrower taking out a fixed rate owner-occupier loan paying principal and interest with a revert rate of 3.85%. Household income assumes one adult working full-time and one adult working part-time earning half the wage with two dependent children and no other debts. Minimum household expenditure is applied, depending on income.
(Source: RateCity) Calculations are based on CBA’s serviceability calculator for a borrower taking out a fixed rate owner-occupier loan paying principal and interest with a revert rate of 3.85%. Household income assumes one adult working full-time and one adult working part-time earning half the wage with two dependent children and no other debts. Minimum household expenditure is applied, depending on income.

 Borrowers waiting for their mortgage to settle will still be processed under the 2.5 per cent rule. 

The same goes for those with pre-approval, however they will need to buy and make a full loan application within 90 days for some lenders. 

“While the big banks have all said they’ll honour pre-approvals, if your circumstances have changed you might have to start from scratch under the new rules,” RateCity research director Sally Tindall said.

“The last thing you want your new home loan to do, is to fall short.”

“While buyers who aren’t borrowing at or near capacity are unlikely to be deterred, this new change could be the last straw for some first home buyers trying to stretch themselves to get into the market,” Tindall said. 

“Although the new higher mortgage stress test may seem frustrating for some people, this move is designed to protect borrowers when rates will undoubtedly rise.

“APRA considers loans with a debt-to-income ratio of six or higher to be risky, and already, 21.9 per cent of new loans hit this benchmark in the June 2021 quarter.”

How the big four banks are managing existing home loan applications:

Note: the scenarios below assume there are no material changes to the application. Material changes could trigger a re-start of the application. (Source: RateCity)
Note: the scenarios below assume there are no material changes to the application. Material changes could trigger a re-start of the application. (Source: RateCity)

CoreLogic is due to reveal how much home values have grown across Australia on Monday 1 November, amid anticipation that the Reserve Bank of Australia will increase interest rates sooner than expected. 

“If debt-to-income levels keep rising we’re likely to see APRA intervene with additional restrictions before the year is out,” Tindall said.

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